Understanding Uninstalled Materials Under the New Revenue Standard

Typically, uninstalled materials consist of standard materials that are easily transferable to other jobs and those which are custom ordered for projects.  The cost of standard materials was never to be included in job costs until installation occurred.  Conversely, if custom materials met certain criteria, you could include the cost in job progress prior to ASC 606 implementation.

After implementation, custom materials are treated as follows:

  • If the contractor still retains control of the materials, they are reported on the contractor’s balance sheet as inventory.
  • If the job owner has control of the materials, the cost of materials only (no profit) is included in job costs and revenue.

How do you determine “control”?  That’s a great question, but some things to consider may be:

  • Has the owner been billed for/paid for the materials included on the AIA billing?
  • If the contractor was fired from the job by the owner, who would take possession of the materials?
  • If the contractor declared bankruptcy, who would take control of the materials?

The following illustrates how owner controlled uninstalled materials are reported before and after implementation of the new standards:

 

 

 

 

 

 

Are you ready for implementation? Answering the following questions will help determine if your organization is ready.

  • Who within your organization is responsible to identify uninstalled materials?
  • Who is assessing who has control of those materials?
  • Who is determining the dollar value to assign to uninstalled materials?
  • How are you getting the appropriate information out of your system to correctly report this information?
  • Do you need to make changes to your system to assist in the above calculations and assessments?
  • Do any changes need to be made in internal controls to properly account for uninstalled materials?
  • If the contractor was fired from the job by the owner, who would take possession of the materials?
  • If the contractor declared bankruptcy, who would take control of the materials?

 

KatzAbosch has individuals experienced in contractor issues and trained in process improvement using lean six sigma principles that can help you through this transition. If you have questions about this information, please contact your KatzAbosch representative or contact us here.

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